FSA overrules CGT defence for recommending DIFs

An oft-cited reason for selecting a distributor influenced fund (DIF) over an independent vehicle - that it can mitigate clients' capital gains tax (CGT) liabilities - is not a strong enough standalone reason for recommending it, the FSA has said.

The regulator said DIF structures that allow underlying investments to be traded within the fund - thus potentially avoiding CGT - may "not be effective tax planning for all clients".

It said many clients would benefit from making some use of their annual CGT allowance each year rather than building up a liability over time within a DIF.

The point is made in proposed guidance (read it here) issued by the regulator today, which takes account of the impact the FSA expects the RDR will have on the DIF market.

Firms advising on DIFs should no longer receive a share of the annual management charge for their role on a DIF governance committee, the FSA proposes.

It also said adviser charges paid for recommending a distributor-influenced fund should not vary inappropriately compared with substitutable or competing retail investment products.

Finally, it said it believes it will be "extremely difficult" for firms to recommend DIFS and meet the RDR standard for independent advice.